Mr. Market always wins - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 28 May 2010
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Mr. Market always wins A  A  A

Paris, France

Well, the fans are getting their money's worth. After staggering through the last four or five rounds, the Dow suddenly came back to life yesterday.

It got up off the mat. Straightened its shorts. Did a little dance. And then wham... By the time the bell sounded, it was up 284 points.

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Gold ended the session almost unchanged.

So what do you think? Who's gonna win this match? Mr. Market? Or the fixers?

We'll tell you: Mr. Market.

We don't know how. We don't know when. But we know two important things:

First, the fixers don't know what they're doing.

Second, what MUST happen WILL happen.

Bernanke and Geithner tried to fix this fight. But the fix wouldn't stay fixed. Each time they proclaimed victory, along came new evidence that Mr. Market wasn't giving up. And for the last couple of weeks, Mr. Market seemed to have the fixers on the ropes.

The fixers tried all the usual tricks - cheap money, bailouts, and boondoggles. In fact, they used more tricks and fancy footwork than anyone ever had before. Still, the economy barely responded.

And now, the latest figures show that the 'recovery' isn't developing as it was supposed to. Trillions of dollars' worth of stimulus and there are still 11 million unemployed and 40 million people on food stamps.

An IMF economist says he thinks real estate prices are headed lower. Inventories of unsold houses remain extremely high. Foreclosure rates are at record levels.

The job picture is disappointing too. With the government spending so much money, you'd think we would see a big improvement. But, by and large, people who lost their jobs in the crisis of '07-'09 are still out of work. Many of their jobs were not merely put on hold - they were eliminated forever. And the economy is not creating many new ones.

Economists believed that a falling dollar would help US exports...increasing employment in the US. But when Europe got into trouble, the dollar went up! Americans felt the warm glow of schadenfreude. But the falling euro is great for Europe and a disaster for the US. Germany was already one of the top exporters in the world. Now, Germany is exporting even more. And US employment is still sinking.

Consumers are ready to spend. They're willing. But they don't have any money. We reported yesterday that people are earning less of their money from the private sector than ever before. The rest of their spending money comes from the government. They're called 'transfer payments' - money that is transferred from one person to another. You see the trouble right there. If you have to transfer the money from one citizen to another, there is no net gain.

In fact, there is a net loss. Anytime you take money away from people who've earned it...and give it to people who didn't...you are asking for trouble. Don't believe it? Try it in your neighborhood. Let us know how it works out.

Of course, the fixers have no idea what they are doing. All they have is a crackpot theory about the way an economy works. They stick with it despite the fact that it makes no sense in theory...and has never actually worked in practice.

In the real world, Mr. Market always wins. He always wins because he IS the real world.

You can't fix fights in the real world of economics. You're wasting your time trying.

*** Probably the most important news this week comes from the Telegraph in London, relying on figures from John William's Shadow Stats:

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It's frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama's top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

*** President Obama banned drilling in the Gulf. Poor Obama. The pundits are practically blaming him for the oil spill. They say the oil slick is his "Katrina moment." Or that his response to the disaster calls his competence into question...

The underground gusher may or may not be coming under control. The news this morning is contradictory.

But it seems unfair to pin the problem on America's chief executive. What does he know about drilling for oil? Or about plugging holes under the ocean? Nothing.

He's a bright fellow...but he's spent his entire life in academia and politics. What do you expect? He doesn't understand how the natural world works...or how an economy works. And he has are plenty of experts around him to give him a bum steer.

***

To Get Rich is Glorious

By Bill Bonner

Imagine the looks on their faces, when Deng Xiaoping sold them out.

The old commies in China had tried to make steel in backyard barbecues. They'd carried the fat Mao on a litter, on a long march to nowhere. They'd pretended his Little Red Book was more than drivel. They'd endured one absurdity after another...purges, starvation, and misery...all for the cause.

And now this...

"To get rich is glorious..." Xiaoping is alleged to have said.

Whether he said it or not, millions of Chinese took it to heart. They got richer, faster than any people ever had. The economy is now 10 times larger than it was then; it grew 300% just in the last 10 years. Incomes rose every year. That there are now more millionaires in China than in France. Three times as many as in Britain. And there are more people becoming millionaires than anywhere else on earth.

Three decades ago, the world's hinge creaked. Deng Xioaping opened a door in 1979. He announced a new oddity, a "socialist market economy."

We can imagine the looks on faces in Washington and London too. And why shouldn't they gloat? They had won the Cold War; they had no idea that their victory would be fatal.

China took the capitalist road in 1979. Russia was not far behind. By the mid-'80s, it was already spending half its entire output on its military. And then the Americans started talking about neutron bombs and a "star wars" program. Leonid Brezhnev had a stroke. His successors faced the challenge, first with perestroika and finally with capitulation.

Meanwhile doors opened and shut in England, France and America, too. Maggie Thatcher moved into #10 Downing St. in 1979. Ronald Reagan brought 'Morning in America' to the White House in 1980. Like Thatcher and Xioaping, Reagan was determined to reduce the government's role in the economy. And in 1981, Francois Mitterand entered the Elysee Palace in France. His stated goal was the opposite -- to increase state involvement in the economy.

No matter what direction they claimed to be going, all the western economies ended up in more or less the same place - on the road to debt serfdom. While China got rich by encouraging (or perhaps merely allowing) capital formation, western nations got poorer, relatively, by consuming capital.

In France, and much of the rest of Europe, government led the consumption boom. While households continued saving at relatively high levels, Mitterand raised the cost of the welfare state. Minimum wages went up 10% immediately. Then, he cut the work week and added so many benefits for the working man that the system barely worked at all. French government debt rose from 20% of GDP in 1980 to 80% now; in a couple more years, the government will have spent an entire year's output that France had not yet put out.

In Britain and America, government spending rose too. But household spending went up even faster. The resulting boom was almost magical; the effects were diabolical. Britain went from a debt/GP ratio of 43% in 1980, to over 65% today. Its deficits rose up too and now are projected to the highest in the European Union - as much as 13% of GDP. But the big expansion in both Britain and America was in private household debt. Combined with government borrowing, it pushed total debt from about 150% of GDP in the mid-'80s to as high as 400% today.

Japan - the other major 'western' economy - has total government debt of nearly 200% of GDP. Its deficit is now so large that it must borrow an amount equal to the total it collects in income taxes. It is said, of course, that Japan has much debt but also much savings. The trouble is, the savings and the debt are largely the same money. Households saved. Government borrowed the money. The savings that are supposed to offset the debt have already been spent.

All together, Europe, America and Japan have total government debt of about $32 trillion, compared to total output of $34 trillion. Add $50 trillion or so of private debt, and you begin to see the bottom of the hole. In other words, the developed economies have borrowed nearly 3 years' worth of future output. At 5% interest, (investors recently wanted Greece to pay 16%!) this means the western world must give up all the output from January 1st to the end of February just to stay in the same place.

Meanwhile, back in China, last week's visit to China revealed a glorious transformation. In the early '80s, a visit to China was a hardship. The streets were drab. The people were drabber, in their grey clothes and grey towns. They stared at tourists as they had never before seen a capitalist. Minders still accompanied tourists. Most of the country was off-limits. There were few private automobiles and few roads deserving of them.

In just 3 decades Beijing has become one of the world's most dynamic, forward-leaning cities, with new Audis and Mercedes bumper to bumper...as far as the eye can see. There are sparkling office towers with millions of earnest workers...and gleaming hotels with sleek prostitutes in the lobbies. Chinese entrepreneurs hustle deals at every table.

China is still an emerging economy. Europe, Japan and the USA, on the other hand, are submerging - sinking in a sea of debt. Getting rich is glorious. Getting poor is a damned shame.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Mr. Market always wins"

ABHIJIT ROY

May 29, 2010

Either Mr Bonner is right - or he is one of many so called EXPERTS in the world who have a divergent view. But one thing is for sure, he hates the present American regime, he is not a Democrat and his rhetoric is a bit too strong to sound balanced and reasonable !

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rammohanrao g

May 29, 2010

A very balanced factual assessment/prediction of the state of economy in the western countries .Our country cannot insulate itself from these developments and should take necessary steps to mitigate the fallout.We are also increasing populist schemes like NREGS ,WHICH ARE FRAUD PRONE.Our Administrators have no clue as to how to reduce Inflation,but keep on making statements assuring reduction in Inflation and increasing GDP growth.

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